No. 15, Third Quarter 2008

SmartCapital European Edition—Current Legal Issues for Investors in European Businesses

Shariah-Compliant Private Equity Funds By Kai Schneider

As a result of record-high oil prices, the Middle East is experiencing unprecedented financial liquidity. This has fueled a boom in the demand for Islamic financial products, including Shariah-compliant private equity funds. Kai Schneider Associate Corporate Department

The Islamic finance market is currently estimated to be around US $700 billion globally and Muslims, who now number close to 1.3 billion worldwide, are also increasingly seeking religiously acceptable products in which to invest. Conventional private equity fund managers have the opportunity to access this growing investor base by offering fund products that comply with Islamic principles. This article provides a brief introduction to the basics of Shariah and the related investment restrictions and structuring issues raised by a private equity fund. It focuses on private equity funds and does not specifically address the Shariah issues raised by other types of funds, such as

Inside This Issue

hedge funds, and their operations. The Basics Many Muslim investors conduct their commercial activities in accordance with an Islamic body of law called Shariah. Shariah, or literally “the way,” is based on the Quran (the religious text in Islam), hadith (the sayings and actions of the Prophet Mohammed (PBUH)), ijma (the consensus of Shariah scholars), qiyas (reasoning by analogy) and centuries of interpretation and precedent. Shariah is also supported by other principles advocating risk sharing, individual rights and duties, property rights and the sanctity of contracts. Generally, in the context of commercial activities, Shariah prohibits riba (the collection and

Shariah-Compliant Private Equity Funds............................................................................................... 1 PIPE Investments in the UK ................................................................................................................. 4 News on Stake Building in Germany..................................................................................................... 6 Latham News......................................................................................................................................... 8 Country Update - UK Pensions Regulator Takes Action Against Private Equity Seller......................... 9 Special Purpose Acquisitions Companies............................................................................................ 10 Recent developments in the de Minimis exception in UK merger control: the FMC/ISP and the Nufarm/AH Marks decision................................................................................12 UK Companies Act 2006: October 2008 Implementation Update.........................................................13 Recent European Deals....................................................................................................................... 15

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Continued from Page 1 — Shariah-Compliant Private Equity Funds

payment of any predetermined guaranteed rate of return, such as interest), gharar (an unacceptable level of risk or uncertainty) and investments in industries that are haraam (against Islamic values). Shariah law does not have a uniform set of standards and interpretations. While some institutions, such as the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), work to unify the various interpretations and opinions of scholars, they have no enforcement power. Accordingly, whether an investor views a particular private equity fund and its investments as “Shariah-compliant” will depend upon the review and approval by a Shariah consultant or supervisory

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While Shariah compliance adds an additional layer of complexity to a fund, traditional private equity funds are uniquely positioned to take advantage of this growing market”.

board engaged by the fund manager or, indeed, the investor’s own consultant or supervisory board. Structure Due to its investments in equity and risk sharing between investors and management, the traditional private equity fund fits nicely within the Shariah paradigm. The standard management structure of a private equity fund is permissible under Shariah. The management fee is considered an agency arrangement (where the fee is a fixed amount or a percentage of capital commitments or net asset value) and the carried interest or performance fee is viewed as a mudaraba agreement (a silent partnership where one party provides capital and the other party provides expertise and management in return for a share of the profit). While the basic documentation for a Shariah-compliant fund is similar to that of a conventional fund, certain terms, such as the equalization mechanism for investors admitted after the first closing and the charging of interest on amounts due by defaulting limited partners, must be revisited in the context of Shariah. Shariah-compliant private equity funds are normally structured as standard limited partnerships. Since Shariah prohibits investments in preferred shares, a corporate vehicle is typically not feasible due to the existence of separate management and

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participating classes of shares. One alternative is a unit trust structure, whereby a fund company issues units to investors. Such a contractual arrangement is quite common with Middle East-sponsored funds domiciled in Bahrain. Shariah-compliant private equity funds with international sponsors, however, are typically domiciled in the Cayman Islands or other traditional offshore jurisdictions familiar to international investors. As a result of their unique operating and investment restrictions, fund managers also frequently establish the Shariah-compliant fund as a parallel fund, which invests proportionately in portfolio investments on substantially the same terms and at the same time as a separate conventional fund. While the parallel fund will have the same fund manager and investment focus as the conventional fund, such a structure allows the fund manager to provide a Shariahcompliant investment vehicle for investors without restricting the operations of the conventional fund and burdening its investors with any additional costs. Investment Restrictions In order to qualify as Shariah-compliant, a fund’s investment policy must contain restrictions that prohibit investments in industries considered haraam. These restrictions usually prohibit investments in companies involved in the following industries and activities: • conventional financial services (including conventional banks and insurance companies); • gambling and casinos; • alcohol or pork products; • certain entertainment, such as gossip columns or pornography (but often including cinemas, music and publications); • weapons or military equipment; and • any other immoral or unethical activities identified by the Shariah consultant or supervisory board. The application of these investment restrictions is subject to differing interpretations. For instance, some Shariah scholars argue that an investment by a fund in a hotel or restaurant that serves alcohol is prohibited, whereas other scholars argue that if the alcohol sales are less than a certain percentage of the revenue of the hotel or restaurant, the investment by the fund may still qualify as Shariahcompliant. While a Shariah-compliant fund may engage in leverage through the use of Islamic financing instruments, it may not obtain or provide conventional loans or otherwise invest in conventional interest bearing instruments, including convertible debt securities. Cash held by a fund may only be invested in Shariah-compliant, short-term

investment products, such as Islamic money market instruments. As Shariah prohibits the payment of any predetermined guaranteed rate of return, investments in preferred shares or fixed income securities are also restricted. Similarly, a Shariah-compliant fund is subject to restrictions on the amount of conventional leverage permitted at the portfolio company level. This often takes the form of financial parameters in relation to the debt to equity ratios and interest income of its investments. The generally accepted standard is that the ratio of total conventional debt to total assets should be less than 33 percent. Additionally, the ratio of interest income (plus income from any incidental haraam or unidentifiable activity) to total revenue typically must be less than 5 percent. The ratio of liquid assets (cash plus accounts receivable) to total assets should be less than 45 percent. Finally, any conventional debt of a portfolio company must be restructured in a Shariah-compliant manner generally within three years after acquisition. It is usually possible to purify any haraam earnings of a fund by separating them from the fund’s legitimate profits and donating them to an approved charity.

Shariah Consultant or Supervisory Board A Shariah-compliant fund must appoint a Shariah consultant or supervisory board that reviews proposed investments and operations and issues opinions as to their compliance with Shariah. Most Middle East private equity funds simply engage an already existing Shariah board (typically the Shariah supervisory board of the fund’s sponsor or anchor investor). Alternatively, a fund may hire a Shariah consultant or establish its own Shariah supervisory board comprised of various Islamic scholars. There are also certain service providers with their own Shariah boards, which may be engaged on a contractual basis to advise a fund.

The Shariah consultant or supervisory board is required to review and approve the private placement memorandum and other fund documents. The Shariah consultant or supervisory board routinely reviews the fund’s activities and produces a report regarding ongoing Shariah compliance (usually on an annual basis). Such a review may involve, among other things, visiting portfolio companies and the examination of documentation pertaining to investments. Details of investments proposed by a fund manager, which involve structures or securities not previously approved by a Shariah consultant or supervisory board, are usually presented to the consultant or board for review and approval prior to investment. In order to ensure Shariah compliance, the Shariah consultant or supervisory board may actually require a fund to dispose of investments, liquidate businesses or activities owned or conducted by a portfolio company, deleverage the capital structure of a portfolio company and/or substitute conventional financing with Islamic financing instruments. Conclusion The interest in Shariah-compliant funds from investors in the Muslim world will continue to grow. Fund managers seeking to access this investor base will need to ensure that their funds comply with the above Shariah principles. While Shariah compliance adds an additional layer of complexity to a fund, traditional private equity funds are uniquely positioned to take advantage of this growing market.

For further information, please contact Kai Schneider at [email protected]. n

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008

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Pipe Investments in the UK By Martin C. Saywell and Piero V. D’Agostino

Martin C. Saywell Partner Corporate Department

PIPE transactions are private investments in public equity. They generally involve a cash subscription by an investor in newly issued securities of a listed UK company. Securities include shares, securities convertible into shares and the grant of options and warrants to subscribe for shares. Earlier this year we acted for One Equity Partners on its US$150 million PIPE investment for 12 percent of Clipper Windpower, an AIM listed manufacturer and distributor of wind turbines. This has been one of the most prominent PIPE transactions to have completed in the UK in recent years. The onset of the credit crunch has also led a number of companies to look at their options for raising equity capital, other than by way of the traditional rights issue. This summer, Barclays Bank undertook a successful placing and open offer although Bradford & Bingley was unable to complete a proposed PIPE investment by TPG.

Piero V. D’Agostino Associate Corporate Department

This article looks at some of the key legal points to emerge for PIPE investments in the UK.

Authorisations and Consents A UK-listed company will need to have sufficient authorised and unissued share capital. Its directors will also need to have requisite authority to allot the shares. Finally, statutory pre-emption rights will need to be disapplied for cash subscriptions. If any of the existing resolutions on these matters are not sufficient, a fresh resolution will need to be passed at an extraordinary general meeting of the company convened for the purpose or at the annual general meeting. The notice period depends on the business to be conducted; 21 clear days to disapply statutory pre-emption rights and amend the articles of association of the company and 14 clear days for most other business. A PIPE investment of any magnitude will require the company and the investor to take account of the views of the UK institutional investment community. This is expressed in the Pre-emption Group Statement of Principles. It recommends that a disapplication of statutory pre-emption rights should generally be limited to 5 percent of ordinary share capital in any one year, with a cumulative limit of 7.5 percent in any three-year rolling period. It also recommends that any discount at which equity is

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issued is restricted to a maximum of 5 percent of the best bid and offer prices immediately prior to the proposed issue. The Statement of Principles recognises that there are circumstances where these parameters may not be appropriate and that greater flexibility may be required for AIM companies. Although there is no sanction for not following the guidelines, share issues are closely watched by the UK institutional investment community and companies do not generally ignore them. The proposed Bradford & Bingley PIPE investment mentioned above was heavily criticised by the UK institutional investment community at the time, in part for how it would have diluted the holdings of existing shareholders. Finally, careful consideration needs to be taken of any contractual pre-emption rights or protective antidilution rights of any existing debt securities, options or warrants. Listing, Prospectus and Disclosure and Transparency Rules Shares generally cannot be offered to the public in the UK unless an approved prospectus has been made available to the public before the offer is

made. There is, however, an exemption available if the offer is made to fewer than 100 people and PIPE investments are usually made through a single subscribing entity. Small issues of shares can, in any event, be made by a UK-listed company without the cost and inconvenience of producing a prospectus. The Listing Rules provide that an issue of shares which increase the number of shares in a class already listed by less than 10 percent does not require a prospectus. The company will be required to make an announcement without delay under its continuing obligation requirements when the subscription agreement for the issue of the shares is agreed. The investor also has an obligation to notify the company when it makes an acquisition of voting rights in the company in excess of 3 percent as soon as possible, and in any event within two trading days of the acquisition. Takeover Code In the context of an acquisition of a substantial shareholding in a listed company, consideration needs to be given to Rule 9 of the City Code on Takeovers and Mergers. This provides that where a person — whether in a series of transactions over a period of time or not, acquires shares which together with shares held by his or her concert parties carry 30 percent or more of the voting rights of the company — then that person is required to make a mandatory offer to acquire all of the issued share capital of the company. Mandatory offers are restrictive; only a general offer and not a scheme of arrangement can be used, the offer can only be subject to a 50 percent acceptance condition and anti-trust conditions and must be in cash or accompanied by a cash alternative. Corporate Governance A notable feature of some recent PIPE transactions involving financial investors is the corporate governance protections usually seen in buy-outs being used to protect their investment in a listed company.

Contractual Investor Protections The subscription will be subject to standard conditions for regulatory approvals, any necessary shareholder approvals and the like. In addition, and particularly noteworthy where the listed company or its sector is in some financial difficulty, investors will seek to include a business and market no material adverse change condition.

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The onset of the credit crunch has also led a number of companies to look at their options for raising equity capital, other than by way of the traditional rights issue”.

The investor will also expect to get customary business representations and warranties from the company, in particular in relation to compliance with its disclosure obligations, so that all material information concerning the company and its business is disclosed to the market. An investor may, depending on the circumstances, be able to negotiate contractual anti-dilution (preemption) protection in addition to its statutory preemption rights. Finally, the company will usually seek to have the investor bound by customary lock-up and standstill arrangements.

For further information, please contact Martin Saywell at [email protected] or Piero D’Agostino at piero.d’[email protected].

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In addition to one, but more often two, nonexecutive directors on the board of the listed company if a minimum shareholding is retained and representations and warranties in the subscription agreement, it is now often the case that consent rights over certain capital, financial and business activities of the listed company are granted in a relationship agreement between the listed company and the investor.

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008

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News on Stake Building in Germany By Dirk Kocher and Dorothea Bedkowski

Dirk Kocher Associate Corporate Department

Both strategic and financial investors have great interest in building up stakes in listed companies without triggering disclosure obligations. This is of particular importance in the preparatory phase of a public takeover but may also be true for Private Investments in Public Equities (PIPE) transactions. Before the deal becomes public, shares can usually be bought at a lower price.

In case of a public takeover, the possession of a significant stake may discourage defensive acts by the target and may also be an effective deterrent to possible white knights. Stake building is currently very much the focus of discussion in Germany Dorothea Bedkowski because the respective Associate disclosure rules are being Corporate Department amended by the so-called Risk Limitation Act and due to the discussions around the use of SWAPs in the stake building for the Continental bid by Schaeffler. New disclosure rules – Risk Limitation Act Stakes in German-listed companies have to be disclosed if the thresholds of 3, 5, 10, 15, 20, 25, 30, 50 and 75 percent are either reached or crossed. The 30 percent threshold triggers the obligation to launch a public tender offer. There are numerous rules on the attribution of voting rights, e.g. through shares held by subsidiaries or for the account of somebody else. The same disclosure rules apply to financial instruments that give the right to acquire shares (with the exception of the 3 percent threshold). Cashsettled instruments are excluded unless — under their terms — individualized shares are held for the account of the counterparty. The Risk Limitation Act brings important changes to some details of these rules. New rules on acting in concert The German Federal Supreme Court (Bundesgerichtshof) had limited acting-in-concert as a basis for the attribution of voting rights to the arrangement concerning the execution of voting rights in the general meeting. Under the new rules, even cooperation outside of the general meeting

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may now constitute acting-in-concert if the parties intend to change the company’s strategic direction in a permanent and substantial manner. On the other hand, cooperation in order to protect the status quo is irrelevant outside of the general meeting. As before, the coordinated acquisition or disposal of shares does not constitute acting-in-concert. Aggregation of shares and financial instruments Under the old law, a single investor could build up a stake of up to 2.99 percent in shares plus 4.99 percent in financial instruments without triggering any disclosure obligations. This will now change since any shares held or attributed will be taken into consideration for determining the notification thresholds for financial instruments. As a result, the new maximum stake is 4.99 percent in total, of which a maximum of 2.99 percent may be in shares. Information duties and sanctions An investor who acquires 10 percent or more will have to disclose the purpose of his or her investment (investment intent) and the source of his or her funds within 20 trading days under the new rules, unless the issuer has opted out of this rule in its articles of association. A violation of the German disclosure rules may lead to administrative fines of up to € 200,000 (up to € 1,000,000 in cases where a mandatory public tender offer is not published) and the exclusion of all shareholder rights (in particular voting rights and dividend rights) until a correct notification is made. Under the new rules, the exclusion of voting rights will persist for at least six months after the notifications have been made (or corrected) if a mistake affects the number of voting rights in such a way that the number is wrong by at least 10 percent or a threshold would be reached if the number was corrected and if the mistake is based on intentional misconduct or gross negligence.

Whereas the new provisions on acting-in-concert, as well as the stricter sanctions, came into force immediately, i.e. on 19 August 2008, the aggregation rule will only apply from 1 March 2009 and the new information regime for significant shareholdings will become effective on 31 May 2009. SWAPs and the Continental case Facts of the Continental case Besides using the maximum amounts for buying shares and options, the German family owned Schaeffler group had announced that they had entered into Total Return Equity SWAPs for 28 percent of the capital of Continental AG with the right of termination at any time. The SWAPs were cash settled, i.e. Schaeffler had no right to request the delivery of shares. The bank acting as counterparty was free to hedge the SWAP by buying shares but had no obligation to do so. The bank did not disclose its hedging positions — if any — under the notification rules for shares or financial instruments. Finally, Schaeffler went public and announced a take-over bid for Continental. The German regulator (BaFin) has accepted this and decided not to enforce any disclosure obligations or sanctions. This is based on the understanding that there are no side agreements (even as gentlemen’s agreements) according to which the bank was supposed to buy shares and/or sell them to Schaeffler afterwards. It may be debatable how clear this result is regarding a possible attribution of shares bought by the bank that may be regarded as being held for the account of Schaeffler. However, as long as the bank had no obligation to do so, there are strong arguments against an attribution. Suitability for stake building This case shows that SWAPs can be an efficient method of avoiding disclosure. However, if used, an investor has no control over shares either, and the investor cannot be sure that (i) the banks will hedge the SWAP position by buying shares and (ii) the banks will finally tender these shares under the public offer of the investor. Both may or may not be the case. In particular, if a competing bidder offers a higher price per share, the banks will be hard pressed to justify anything but accepting the higher offer. If they accept the lower offer of their SWAP counterparty, there may be suspicion that there actually was a secret deal and that disclosures should have been made.

Especially in this case one will have to check carefully also for any violation of insider trading rules by all parties involved.

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Stake building is currently very much the focus of discussion in Germany because the respective disclosure rules are being amended by the socalled Risk Limitation Act…”

Conclusion Since Continental was the first case were SWAPs were used in preparation for a take-over bid in Germany, this gave Schaeffler a big advantage at the outset since most observers believed that Schaeffler really controlled the 28 percent stake. Once the market has understood that disclosure can only be avoided if there is no such control, the benefit for an investor may be much more limited. However, this strategy may still work, in particular if there is no competing bid. It also remains to be seen if the legislator will intervene or if the regulator will become more active in other cases if any side agreements are detected. Finally, a court may still come to a different conclusion than the regulator.

For further information, please contact Dirk Kocher at [email protected] or Dorothea Bedkowski at [email protected]. n

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008

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Latham

news

New Partners – Milan and Dubai Latham & Watkins is pleased to announce that two new partners have joined the firm, one in Milan and one in Dubai. Antonio Coletti has joined the firm’s Milan office as a partner in the Corporate Department. Mr. Coletti is a corporate finance attorney with extensive experience representing investment banks, private and public companies and private equity funds in relation to IPOs, secondary equity offerings, rights issues and convertible bonds issues. He advises listed companies in relation to general corporate and compliance matters and also advises companies regarding the distribution of UCITS, the establishment and placement of real estate investment funds and financial market regulation. Mr. Coletti has strong ties to international and Italian investment banks and a track record of advising on some of the most high-profile securities transactions worldwide. Tim Ross has joined the firm’s Dubai office as a partner in the Finance Department. Mr. Ross is a recognised leader in financing transactions involving entities in the Middle East. He has extensive experience representing banks, borrowers and funds in high value syndicated loans, acquisition finance, private equity and restructuring transactions.

Latham & Watkins Relocates Group of Experienced Partners to the Middle East Latham & Watkins is pleased to announce that four partners from the firm’s London, New York and Silicon Valley offices will be relocating to the Gulf Region this year. The group comprises London corporate partners Bryant Edwards and Charles Fuller, New York finance partner Kenneth Schuhmacher and Silicon Valley corporate partner Nicholas O’Keefe. Bryant Edwards has recently been appointed as Office Managing Partner for the Middle East offices. New York finance partner William Voge and San Francisco corporate partner Tracy Edmonson will be moving to the firm’s London office in the coming months. Mr. Voge has extensive experience in all aspects of project development and project financings and has a formidable track record advising on some of the most high profile energy deals in the Middle East. Ms. Edmonson is an experienced capital markets partner who will add further experience to the firm’s already strong corporate finance team in Europe.

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We are focused on growing the practice and the arrival of the new partners significantly enhances our regional credentials – and our intention to be the leading transactional firm in the Gulf”.

— Bryant Edwards Office Managing Partner, Middle East

BTI “Power Elite” Latham & Watkins was named to BTI’s 2008 “Power Elite” — a group of leading law firms chosen based on client satisfaction and service that “boast the most and the best client relationships”, according to BTI Consulting. To compile the list, BTI polled more than 400 corporate counsel at Fortune 1000 companies and large organisations. Benchmarked against more than 350 law firms, Latham continues to have a top market position with clients four years running. According to the study, firms within the BTI “Power Elite” possess more primary relationships with large and Fortune 1000 clients, win more slots on clients’ short lists, demonstrate prowess in “bet-the-company matters” and boast superior levels of client satisfaction.

Legal Business “Global Elite” Latham & Watkins has once again been named to the “Global Elite” group of firms, according to Legal Business. The “Global Elite” is a list of the world’s 18 most prestigious law firms that continue to represent the pinnacle of the legal profession, according to the magazine. “To be considered a member of the Global Elite”, Legal Business writes in its July / August 2008 issue”, a firm must be able to demonstrate market-leading prowess in two of three key practice areas — M&A, finance and disputes; boast a disproportionately high number of relationships with financial institutions, FTSE-100 or Fortune-250 clients; and be considered serious competition in either M&A or finance by firms on both sides of the Atlantic”.

Country Update UK Pensions Regulator Takes Action Against Private Equity Seller The UK Pensions Regulator has recently required Duke Street Capital (DSC) to pay £8 million into the underfunded defined benefit pension plan of one of the Wickes group of companies, which DSC had sold to Cerberus Capital Management in 2007. Although the Regulator’s right to do so has always been clear in the legislation, this is the first time that it has taken action against an entity which is no longer connected with the relevant pension plan. It appears that the Regulator stopped short of actually issuing a contribution notice or financial support direction (known as its “moral hazard powers”) to DSC, but commentators suggest it may have threatened to do so. We understand DSC did not seek clearance from the Regulator at the time of the sale, nor was any additional funding made available to the pension plan at that time, and that the Regulator may have concluded that without such mitigation, the transaction was detrimental to the plan. This latest action, together with the proposed widening of the Regulator’s powers in relation to its moral hazard powers, on which we are expecting draft regulations shortly, has prompted industry experts to warn that such actions might deter private equity houses from investing in companies with defined benefit pension plans.

Latham & Watkins | SmartCapital, European Edition—Issue 15, 2008

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Special Purpose Acquisitions Companies By Paco Iso and Xavier Pujol

Paco Iso Associate Corporate Department

After a slow beginning in Europe, 2008 has seen a marked increase in the popularity of Special Purpose Acquisitions Companies (SPACs) with two recent listings on the NYSE Euronext in Amsterdam market. SPACs have evolved over the past few years from single-target acquisition vehicles common in the US, to the multi-acquisition vehicles commonly found on AIM, and now Euronext, listings.

A SPAC is a developmentstage company that has no specific business plan or purpose or, alternatively, has indicated that its business plan is to engage in a future merger or acquisition. SPACs are corporate shells with a Xavier Pujol management team (but Associate no operating track record) Corporate Department formed for the purpose of raising capital through an IPO in order to seek and complete an acquisition of a yet-unknown target within a specified time frame. In this sense, in the US, the SPACs’ purpose generally is to make one acquisition, while in the UK, several acquisitions below the enterprise value threshold are possible. SPACs are not an entirely new phenomenon; they were popular in the United States in the 1970s and 1980s in the form of “blank cheque” companies and were closely scrutinized by US regulators due to a number of frauds on investors. In their new shape, however, SPAC vehicles include significant investor-protection and transparency features which have enhanced their marketability and reduced the monitoring pressure from regulatory bodies. Germany1 Acquisition Limited’s (Germany1) July listing is the third SPAC listing in Amsterdam after Liberty International Acquisition Company (Liberty) in February 2008. Liberty’s listing in Amsterdam represented only the second listing of a SPAC in a regulated European market (following the listing of Pan-European Hotel Acquisition B.V. (PEHAC) in 2007), raising approximately €600 million with the intention of buying a European company with between €3 billion and €5 billion within two years. Germany1 successfully raised €275 million in an initial public offering which, unlike the listing of Liberty, specifically targeted European investors.

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This emphasis was reflected by the fact that 90 percent of the take-up was made by European investors. Although some SPACs had previously been taken public on London’s AIM market, the listings of PEHAC, Liberty and Germany1 represent a milestone for the use of SPACs in the Europeanregulated markets. Main Features Several integral features of SPACs are that they are sponsored by senior investment professionals (who have a significant track record), include institutional investors (e.g. hedge funds, mutual funds, etc.) as shareholders and, in recent times, are often underwritten by “bulge bracket” investment banks. These sponsors share the risk of the venture with the investors by means of the acquisition of sponsor units, composed of shares and warrants. This sponsor investment is usually locked in at least until the consummation of the acquisition (and up to one year post-acquisition). In addition, the sponsors waive their rights to participate in any liquidation distribution if the SPAC is liquidated and the warrants expire without value. In some instances, underwriters have also made an “underwriter coinvestment” by purchasing units in the SPAC. The units offered to the public in the IPO also consist of shares and warrants. The warrants entitle the holder to acquire generally one share per warrant. The warrants are generally exercisable upon the later of the consummation of a business combination and one year from the date of the prospectus, and expire five years from the date of the prospectus. Warrants may also be redeemed upon request by the holder. In Europe, units do not generally constitute independently transferable securities and the underlying shares and warrants trade separately immediately upon issuance. The price of units is fixed in the initial filing and has generally been around $10 per unit. A substantial proportion of IPO proceeds (usually 85-90 percent, and often now closer to 100 percent) is held in an interestbearing escrow or trust account until an acquisition

is completed. The remaining portion of the net proceeds is used as working capital and to cover taxes. In addition, part of the underwriting fee is also placed in trust and will be forfeited if no acquisition takes place. At the time of the IPO, the SPAC’s target company is generally unknown. If a potential target or targets have been identified, no negotiations will have been entered into as this would require their disclosure in the IPO prospectus. To avoid the obvious risks of handing over a ‘blank cheque’ investment, there are a number of customary investor protections: • There is a typical deadline of 18 to 24 months to invest the IPO funds raised. If a suitable acquisition target is not found within the defined time period, the SPAC is liquidated and the funds are returned to investors. • Potential investments are, however, often constrained as regards to their size. SPACs commonly agree, for example, not to carry out any investment unless the value of the target represents at least 80 percent of their net assets and a controlling interest in the target. • Transactions have to be approved by the shareholders (and warrant-holders) prior to their consummation and prescribed acceptance thresholds usually stand at around 65 percent (it is an identifiable trend that rejection thresholds have been increasing from 20 percent to 35 percent and sometimes even to 40 percent). In an approved deal, however, dissenting stockholders commonly have a redemption right over their shares up to a certain percentage of the trust account as well as the option of selling their stock in the market. Sponsors typically agree to vote their shares with the majority. If the approval threshold is not met and the deal is rejected, the SPAC is liquidated and the funds are returned to investors. Private Equity The growth in SPACs will be of interest to the private equity industry because, unlike the familiar model for the private raising of funds, private equity firms can tap the public markets with the transparency and liquidity of a listed company. The number of private equity firms acting as SPAC sponsors is increasing; however, it is important for firms intending to be active in both conventional fund management and sponsoring a SPAC to define their investment policies clearly and regulate the relationship between both areas so to avoid any potential conflicts regarding which vehicle to use at the time of making an investment. Other interesting features of SPACs for the private equity community are: • Firms may decide to work side-by-side with SPACs through the setting up of acquisition consortia. In

an environment of difficult debt-financing, SPACs may find firms to be ideal partners in order to meet the equity funding levels required to complete a deal. • SPACs may act as portfolio company purchasers. The size of the listed SPACs has traditionally limited the scope of companies susceptible to being targeted. However, with the increasing size of SPAC capital raising, it is now possible to see leveraged SPAC acquisitions well above the US $1 billion mark. • SPAC deals bring alternative exit scenarios for buyout firms, allowing them not only to sell a

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The growth in SPACs will be of interest to the private equity industry because, unlike the familiar model for the private raising of funds, private equity firms can tap the public markets with the transparency and liquidity of a listed company”.

•

• •

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portfolio company for cash but offer a method to take a private company to the public markets using a merger or ‘reverse’ takeover of the SPAC. This exit route presents significant advantages when compared to a standard IPO or private sale, particularly in light of stagnant IPO markets, tight credit markets and lower buyout market activity. One practical advantage is that a reverse merger may be executed in a shorter period of time than an IPO (which requires intensive preparation, including lengthy road-shows and negotiations with authorities) and a private sale (which entails substantial negotiations and may be contingent on financing). The SPAC management team is rewarded through the gains on their units following the IPO, rather than through the remuneration or management fee. SPAC acquisitions are usually less leveraged than traditional buyout transactions. Investors who may not otherwise qualify to invest in private equity funds have the opportunity to participate in the acquisition of companies while retaining liquidity (albeit perhaps limited) as a result of the SPAC’s public offering. The investor approval requirements of a SPAC in order to complete an acquisition may make it less able to approve an acquisition efficiently, as compared to a conventional private equity fund.

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• Following the insurgence of ‘greenmail’ where large stakes in the SPAC were accumulated and then sold at a premium to the management by threatening a ‘no vote’ on the business combination, a ‘bulldog’ provision was introduced pursuant to which holders with more than 10 percent of shares (acting as a group) cannot convert their shares for a pro rata share of the trust account. • The officers and directors of the SPAC usually grant the SPAC a ‘right of first review’ pursuant to which they agree, typically until the earlier of the completion of a business combination, 24 months from the IPO or the date he or she ceases to be an officer or director, to present to the SPAC for consideration prior to any other entity, potential acquisition opportunities of private companies with a certain enterprise value.

The SPACs are surging in Europe as they are perceived by the investors as the perfect destination for their funds in the context of a burgeoning market. With 5 to 10 SPACs in the pipeline to raise money through IPOs in the second half of 2008, the coming months appear to be critical for the consolidation of the SPACs in Europe.

For further information, please contact Paco Iso at [email protected] or Xavier Pujol at [email protected]. n

Recent Developments In the de Minimis Exception In UK Merger Control: The FMC/ISP and the Nufarm/AH Marks Decisions By Adrian Cox

The recent FMC/ISP and Nufarm/AH Marks decisions show how the Office of Fair Trading (OFT) is likely to exercise its power to apply the newly revised de minimis exception to mergers involving markets below £10 million in size in practice. The OFT conducts the one-to-two month first phase of UK merger control with jurisdiction to review any relevant merger. It must refer a relevant merger to the Competition Commission (CC) where it believes the transaction has a 50 percent or more chance of resulting in a substantial lessening of competition (SLC). The CC then conducts a lengthy six-month second phase review to decide whether the merger will cause a SLC, and to order any remedial action, including prohibition. The OFT has the power to clear a merger unconditionally rather than refer it to the CC, where the merger involves markets of insufficient importance to warrant a reference (the “de minimis exception”). In November 2007, the OFT produced revised guidance whereby affected markets in the UK worth less than £10 million in annual turnover in aggregate are likely to be considered of insufficient importance (previously £400 million). The FMC/ISP Decision The FMC/ISP merger concerned the acquisition by FMC of ISP’s alginates business. The OFT believed that in the supply of anti-reflux alginates there was a realistic prospect of an SLC.

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In evaluating whether to apply the de minimis exception, the OFT considered the following: • Relevant turnover in the anti-reflux alginates market was less than £2 million; • Although the parties were close competitors, the merger’s adverse impact would be limited if it did not persist; • The adverse impact of the merger would not persist indefinitely: market entry was conceivable in the medium to long-term; and • The acquisition of market power was not a material part of the rationale behind the wider transaction. Overall, these factors suggested that the adverse impact of this merger was very limited. Accordingly, the OFT applied the de minimis exception. Nufarm/AH Marks decision The Nufarm/AH Marks case concerned the completed acquisition of AH Marks by Nufarm. Although not voluntarily notified, the OFT nonetheless investigated this transaction. Both companies are the leading UK suppliers of two chemicals employed to make herbicides used by farmers.

In its assessment of the transaction, the OFT considered that:

lengthy in-depth competition review but only where the OFT judges that any adverse impact on competition is unlikely to be significant and that the de minimis exception therefore applies. Also, the OFT has indicated that it may choose not to apply the exception where an investigation would have important precedent value, and/or a substantial proportion of the likely detriment would be suffered by vulnerable customers. In any event, careful advance presentation of the case to the OFT can increase the prospect of the de minimis exception being applied.

• Nufarm could raise prices post-merger; • Farmers were unlikely to switch to alternative products if Nufarm raised the price of its chemical ingredients; • There was only one other supplier in the UK; and • Foreign suppliers were unlikely to enter the UK market post-merger. Overall, the OFT decided to refer the merger to the CC on the basis that the merger could result in an SLC and that the de minimis exception was not applicable because the merger’s adverse impact was likely to be significant.

For further information, please contact Adrian Cox at [email protected]. n

Conclusion These recent cases demonstrate that mergers involving UK markets below £10 million in size, even between close competitors, may escape

UK Companies Act 2006: October 2008 Implementation Update By Andrew Boyd

Certain provisions of the Companies Act 2006 (the 2006 Act) have come into force with effect from 1 October 2008. The key changes see the relaxation of the financial assistance prohibition and simplification of the reduction of capital procedure for private companies, as well as the further codification of directors duties. Key changes The following key changes are effective from 1 October 2008: • Financial Assistance — restriction abolished for financial assistance for acquisition of shares in private companies. • Reduction of Share Capital — private companies granted director solvency statement alternative to reducing company share capital without having to seek court approval. • Directors’ Duties — fiduciary duties codified relating to conflict of interest, interests in proposed transactions and accepting benefits from third parties. • Corporate Directors — all companies required to have at least one director who is a natural person. Financial Assistance The Companies Act 1985 (the 1985 Act) prohibited private companies from giving financial assistance for the acquisition of shares unless it satisfied a

number of conditions. Under the new provisions of the 2006 Act, the prohibition for private companies is relaxed, so that where shares are to be acquired in a private company, the giving of assistance by that company or a private company subsidiary, is now permitted. Consequently the ‘whitewash’ procedure (which permitted the giving of financial assistance if a number of criteria were complied with) becomes irrelevant for private companies. Although the financial assistance rules remain unchanged for public companies, for private companies, the practical impact of the changes are likely to mean that documentation of many transactions, for example acquisition financings, become less complex. Reduction of Share Capital New provisions of the 2006 Act provide private companies with an alternative to the court sanctioned reduction of share capital procedure under the

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1985 Act, whereby a private company may reduce its share capital by passing a special resolution supported by a solvency statement made by the directors. Directors making solvency statements without having reasonable grounds for doing so may be subject to fines and/or a maximum of two years imprisonment, and it may be for this reason alone that directors of some companies chose the existing court approval route for capital reductions that does not contain this risk to directors; however, the new procedure should provide other private companies with a more expedient means reducing share capital. The new procedure is not an option for public companies, who continue to have to pass special resolutions and seek court approval.

“

Although the financial assistance rules remain unchanged for public companies, for private companies, the practical impact of the changes are likely to mean that documentation of many transactions, for example acquisition financings, become less complex”. Directors’ Duties The 2006 Act codifies what is largely existing law relating to directors’ duties. Codified duties to exercise skill and care, act in good faith in the best interests of the company and act within the powers conferred by the company’s memorandum and articles of association and to exercise powers for proper purposes were implemented in October

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2007, and the remaining three provisions, deferred primarily to allow public companies the opportunity to amend their articles, are effective from 1 October 2008: • Duty to avoid conflicts of interest — imposes a positive duty on directors to avoid having a direct or indirect interest that conflicts with the interests of the company. • Duty not to accept benefits from third parties — forbids a director from accepting a benefit conferred by reason of his being a director. • Duty to declare interest in proposed transaction or arrangement — requires that a director must declare the nature and extent of any direct or indirect, interest in a proposed transaction or arrangement with the company. Corporate Directors The 2006 Act requires that from 1 October 2008, all companies must have at least one director who is a natural person. (There is a grace period until October 2010 for companies who only had corporate directors when the 2006 Act received royal assent on 8 November 2006). Other Provisions The October 2008 implementation brought in the following additional changes: • A right to object to the opportunistic registration of a company name that is the same or misleadingly similar to one in which the applicant has goodwill • A minimum age of 16 for directors • A new form of annual return requiring less information on the company’s shareholders

For further information, please contact Andrew Boyd at [email protected]. n

Recent Our comprehensive experience in all aspects of private equity investment enables us to service the full array of legal needs of fund sponsors and investors alike, from fund formation to investment acquisition, structuring, financing and disposition. The following is a selection of recent European deals.

european deals

Altares D&B

BARTEC Group

LBO Acquisition by AXA PE of Altares D&B, a member of the Dun & Bradstreet Network and leading provider of financial information in France.

Acquisition by Capvis Equity Partners of BARTEC Group, a provider of high-quality industrial safety technology. Not public

Not public

Clipper Windpower plc

Fullsix International

Acquisition by One Equity Partners of 12.5 percent of the outstanding share capital of Clipper Windpower plc, a manufacturer of advanced wind turbines and developer of wind energy projects.

Acquisition by Cognetas of Fullsix International, a leading marketing agency in Europe. €25,000,000

€150,000,000

Hansa Hydrocarbon

Labco

Premier Research Group plc

Investment by Avista Capital Partners in Hansa Hydrocarbons, a company acquiring and developing oil and natural gas reserves in the North Sea and Northern Europe.

Leveraged acquisition by Labco, a European medical diagnostics company, of 30 target companies in France, Spain, Portugal, Germany and Italy. Latham advised ICG as senior and junior mezzanine lender.

Acquisition by the management of Premier Research Group plc of Premier Research Group plc, a pharmaceutical research organization, in a management buyout transaction.

$100,000,000

£60,100,000

€700,000,000

Warwick International Group Limited

SSP Technology A/S

Validate

Sale of the entire issued share capital of Warwick International Group Limited by its parent, Sequa Limited (a subsidiary of Sequa Corporation, which forms part of a group of companies owned and controlled by the Carlyle group)

Acquisition by Ventizz Capital Fund IV, L.P. of a 70 percent majority stake in SSP Technology A/S, a Danish rotor blade manufacturer, from Plambeck Neue Energien AG.

Aquisition by SQS of Validate, a Swedish provider of software testing and quality management services. Not public

Not Public

Not public

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